When you compare W.P. Carey (NYSE: WPC) to its closest peers, it stands head and shoulders above the pack when it comes to diversification. That's a bigger statement than it appears, given the real estate investment trust's (REIT) investment approach. And, over time, this landlord's model has proven pretty rewarding for dividend investors. But when you look at W.P. Carey right now, at this particular moment, is it worth buying? That's a harder question to answer. Here's a quick primer to get you up to speed.
Doing the same thing, differently
W.P. Carey is a net lease REIT. That means that while it owns properties, its lessees are generally responsible for most of the costs of the properties they occupy. It's a fairly safe business in which Carey makes the difference between what it charges for rent and its cost of capital. Even better, the leases are usually pretty long, with Carey's average lease length at around 10 years today. Virtually all of its leases include regular rent bumps, too, with 62% of the increases tied directly to inflation measures.
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None of this is unique; Carey has plenty of rivals that can say the same things. And those competitors have rewarded income investors just as well. To put some numbers on that, Carey has increased its dividend annually for a fairly impressive 22 consecutive years. Net lease peers Realty Income and National Retail Properties have increased their annual disbursements for 26 and 30 years, respectively. All three obviously pay great attention to rewarding investors, noting that, over time, average annualized dividend increases have been in line with or above the growth rate of inflation.
What sets Carey apart is its combination of diversification and an opportunistic investment approach. On the diversification front, Carey's portfolio is spread across the office (25% of rents), industrial (24%), warehouse (20%), retail (17%), and self storage (5%) categories, with "other" making up the balance. No other net lease REIT comes close to that level of diversification, with National Retail Properties 100% invested in retail and Realty Income's portfolio allocation there at roughly 83% (office, industrial, and vineyards round out the portfolio).
That, however, isn't the end of the diversification story for Carey. It also generates around 35% of its rent roll from foreign markets. Most of its non-U.S. properties are in Europe. None of its major peers can claim that level of property type and geographic diversification. National Retail is U.S.-focused and Realty Income gets just 2% or so of its rents from Europe, which is a relatively new development.
Carey's diversification fits particularly well with its investment approach, too. The company prefers to be opportunistic, focusing on the areas that offer the best returns. Note, for example, how little exposure it has to retail compared to Realty Income and National Retail. Many consider retail overbuilt in the U.S. market, with Carey making a conscious choice to put its money into other sectors that look more appealing. And, with exposure to the U.S. and Europe, it can pick which countries offer the best opportunities as well (most of the REIT's retail exposure is actually in Europe, where the sector isn't as overbuilt). Management also likes to originate its own leases, if it can. This allows it to set favorable lease terms and often earn higher returns. All told, W.P. Carey's business model is differentiated in a big way and it is worth a very close look.
Time to buy?
Now consider the fact that Carey's dividend yield is about 4.1% today, roughly double what you would get from an S&P 500 index fund. That 4.1% is also way better than what you'd get from bellwethers Realty Income and National Retail, which offer yields of 3.5% and 3.6%, respectively. On that score, Carey looks like a winner here.
But don't jump so fast: Carey's yield is near the low end of its historical range. In fact, the dividend yield is near the lowest levels in the company's history. Since stock price and yield move in opposite directions, it's worth highlighting that the stock price is near the highest levels in the company's history. While Carey may appear to be a bargain relative to its peers, it still looks expensive on an absolute basis.
Examining this a different way, Carey's projected 2019 adjusted funds from operations (AFFO) of around $3.30 per share puts its price-to-AFFO ratio at a heady 25. That's a number you would expect to see from a growth stock, not a slow-and-steady dividend stock. To be fair, Realty Income and National Retail are also both pretty expensive valued on this metric, which is similar to price to earnings for an industrial concern. But that doesn't change the fact that Carey does not appear to be bargain-priced right now.
Off to the wish list
To paraphrase value investing legend Benjamin Graham, a great company can be a bad investment if you pay too much for it. That appears to be the case today with W.P. Carey (it's also the case for Realty Income and National Retail, as it were). While investors looking for a diversified net lease REIT should definitely keep Carey in their sights, it should probably be on the wish list and not the buy list right now.
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